What’s Behind Record Low Bond Yields?

Currently, yields on government bonds are at record low levels.It is telling that the current U.S. 10-year yield of about 1.5% is acually considered high.

In some countries, like Japan, Switzerland and Germany, the 10-year yield is actually negative even in nominal terms. And despite having higher inflation than these countries, Sweden’s 10-year yield is currently only a few basis points from zero in nominal terms. Inflation protected bonds are at about -1.5%. And if you look at government securities of shorter maturities yields are even lower. So what’s going on here?

Well, there are three possible explanations:
1) A “glut of savings”
2) Monetary expansion
3) Excess risk aversion from investors

Most likely, all three of these factors play a role. China, and other East Asian nations, have a large surplus of savings that they “export”. And as the European debt crisis have made countries tighten their belts and borrow less, creating a surplus of savings.

Meanwhile, as the drop in the prices of oil and other commodities have pushed down consumer price inflation, central banks, doubling down on their inflation-target ideology have pursued increasingly inflationary policies. The problem is that these policies have had much greater effect on the prices of assets. like bonds, than on consumer prices.

Still, it appears that these factors can’t alone explain the drop in bond yields. If they did, then stock prices would have been a lot higher than now. Valuations are above the historical average, but the implicit yield (the reversed p/e ratio), as well as the dividend yield, is relative to bond yields far higher than ever before, implying risk aversion from investors.


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